The Market Today
Stimulus Talks Continue with Progress Cited
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
Monitoring the Virus Headlines: Over the weekend, Speaker Pelosi said a deal must be reached by Tuesday or a next stimulus package would have to wait until after the election. She seemed to soften that stance yesterday, saying, “It isn’t that this day was a day that we would have a deal. It was a day that we would have our terms on the table to be able to go to the next step.” In addition to the apparent lengthening of the runway for an agreement, she noted that the White House had “come a long way” and she was optimistic that a deal could eventually be reached. White House Chief of Staff Meadows said later in the afternoon that the latest call between the two sides was productive enough to keep discussions going today. For his part, Senate Majority Leader McConnell, who has previously said a deal sized to Democrats liking would likely lack enough support from his Republican colleagues to pass, stated a vote would be held in the event that negotiators strike an agreement that is backed by President Trump. Senate Leader McConnell has planned a vote on the smaller stimulus package in the Senate today.
Mortgage Applications Lose Steam but Remain Positive Indicator: Mortgage applications for the week ending October 16 fell 0.6% on a fourth consecutive weekly decline in purchase apps. The average 30-year mortgage rate inched up from a record-low 3.00% to 3.02%. Applications for refinance rose 0.2% on the week but have remained rangebound over the last two months. After declining 2.1% for the week, purchase apps are now down 6.8% over the past four weeks. While almost every housing market indicator remains very strong, the deceleration in purchase apps will be worth watching.
Fedspeak, Beige Book, Corporate Earnings: The Federal Reserve will publish its Beige Book report on regional economic conditions at 1:00 p.m. CT. Speaking from the Fed today are Cleveland’s Mester, Minneapolis’ Kashkari, Dallas’ Kaplan, Vice Chair Quarles, and St. Louis’ Bullard. Today will bring another wave of corporate earnings reports including Tesla, Verizon, Biogen, Abbott, and Baker Hughes, to mention a few.
Stocks Closed Choppy Session Higher With Door Still Open for Stimulus Deal This Week: Stocks closed higher Tuesday, but the final tallies were notably short of larger gains from earlier in the session and the path of improvement was less than smooth. As expected and discussed above, the major focus was on developments and headlines tied to stimulus negotiations during what had been signaled as the final day to strike a deal for more aid prior to the election. The S&P 500, which had gained as much as 1.5% earlier in the afternoon, ultimately ended 0.7% higher after a choppy day of trading around the various stimulus headlines. Longer Treasury yields also rose and the curve closed slightly steeper. While the 2-year yield dipped 0.2 bps to 0.14%, the 10-year yield added 1.7 bps to finish at 0.786%, on top of its highest level since early June.
U.S. Equities Set for Mixed Open as Trading Remains Uncertain: U.S. equity futures were little changed at 7 a.m. CT after erasing gains accumulated during Asian trading as European markets retreated in another uneven global session. The MSCI Asia Pacific Index closed with a 0.6% gain before Europe’s Stoxx 600 slid immediately from the open to trade down 0.9%. The U.K.’s FTSE 100 led all declines across the Atlantic as the pound strengthened on positive comments from the EU’s top Brexit negotiator. After rising as much as 0.8% during the Asian session, futures tied to the S&P 500 were 0.1% lower before the start of U.S. trading. Markets have lacked direction this week as investors continued to assess the likelihood that lawmakers in Washington will be able to bridge the gap between partisan plans and provide more stimulus for the U.S. economy prior to the election.
Treasury Yields Tick Higher Ahead of More Stimulus Negotiations: Breathing a sigh of relief that Speaker Pelosi’s Tuesday deadline for pre-election aid was set in sand and not cement, Treasury yields continue to push higher. With more talks planned for Wednesday and both sides seemingly optimistic about the chances for an agreement despite remaining differences, the 10-year yield was 3.4 bps higher before 7:30 a.m. CT to 0.82%, its highest mark since a quad of closes in early June (which were the highest yields since March).
Evans Sounds More Brazen About Bearable Inflation Overshoot: Chicago Fed President Evans described the current recovery as “very uneven,” said he is “somewhat optimistic” about the pace of that recovery next year, but is “nervous” about inflation. While some are nervous, however, that extreme accommodation from the Fed and Congress could create an unwanted spike in inflation down the road, Evans’s anxieties are tied to the possibility that price pressures could remain weak for a prolonged period of time. He expects that unemployment could fall to 5.5% by the end of next year and as low as 4% by the end of 2022, but again said the Fed needs “to be careful not to prematurely raise rates” until inflation has hit 2% and a “modest” overshoot of 2% appears likely for a time. Previously noting he would consider 2.5% inflation as a “moderate” overshoot, Evans said Tuesday that he would be comfortable with inflation between 2.5% to 2.75% for a year.
Evans Says Fiscal Stimulus Will Have a Greater Effect than More Asset Purchases: With many investors expecting the Fed to soon provide more details on its plan for asset purchases, Evans cautioned Tuesday about the potency of any efforts to provide incremental stimulus through its balance sheet. While the Fed could provide a bit more accommodation by lengthening the duration of its bond purchases, a move which Evans noted he personally sees some value in, he is unsure about how much lower longer rates can fall and how effective any decline would be. Instead, he’s holding out hope for more fiscal aid and said his positive outlook for the recovery depends on it. While markets are laser focused on the timing of an agreement, Evans believes size and scope are more important. Evans said, “timing isn’t necessarily the most important aspect of that. So, if it were delayed until the first quarter and it actually happened in a good magnitude, that probably wouldn’t have a big effect on my outlook.”